Description
Book SynopsisCentral Bank Balance Sheet and Real Business Cycles argues that a deeper comprehension of changes to the central bank balance sheet can lead to more effective policymaking. Any transaction engaged in by the central bank—issuing currency, conducting foreign exchange operations, investing its own funds, intervening to provide emergency liquidity assistance and carrying out monetary policy operations—influences its balance sheet. Despite this, many central banks throughout the world have largely ignored balance sheet movements, and have instead focused on implementing interest rates. In this book, Mustapha Abiodun Akinkunmi highlights the challenges and controversies faced by central banks in the past and present when implementing policies, and analyzes the links between these policies, the central bank balance sheet, and the consequences to economies as a whole. He argues that the composition and evolution of the central bank balance sheet provides a valuable basis for understanding the needs of an economy, and is an important tool in developing strategies that would most effectively achieve policy goals. This book is an important resource for anyone interested in monetary policy or whose work is affected by the actions of the policies of central banks.
Table of ContentsChapter 1: Global Genesis of the Central Bank 1 1.1 Origin of the Central Bank 1 1.2 Roles of the Central Bank 1 Questions 3 Chapter 2: Relevance of the Central Bank Balance Sheet 5 2.1 Understanding Relevance of Central Bank Balance Sheet in Functions of Economy 5 2.1.1 Similarities and Differences between a Company’s Balance Sheet and a Central Bank Balance Sheet 5 2.2 Trajectory Relevance of the Central Bank Balance Sheet 8 2.3 Externality of the Central Bank Balance Sheet Size 12 Questions 13 Chapter 3: Components of Central Bank Balance Sheets 15 3.1 Factors Influence the Reporting Frequency of Central Bank Balance Sheets 17 3.2 Components of Central Bank Assets and their Composition Analysis 18 3.2.1 Foreign Assets 18 3.3 Components of Central Bank Liabilities and their Composition Analysis 20 3.3.1 Banknotes 21 3.3.2 Commercial Bank Reserves 23 3.3.3 Capital 23 Questions 25 Chapter 4: Analytical Framework of Central Bank Balance Sheets 27 4.1 Structure of Central Bank Balance Sheets 27 4.2 Balance Sheet Indicators 28 4.2.1 Computation of Indicators 28 4.2.2 Significance of these Indicators 29 4.2.3 Underlying Assumptions of Four Indicators 29 4.3 Determinants of Central Bank Balance Sheet Composition 30 4.4 Classification of Central Bank Balance Sheet Components 31 4.5 Theoretical Landscape: Quantity Theory of Money versus Quality Theory of Money 32 4.5.1 Quantity Theory of Money 32 4.5.2 Quality Theory of Money 34 Questions 39 Chapter 5: Evolution of Central Bank Balance Sheets and Their Heterogeneous Dimensions 41 5.1 What Makes Central Bank Balance Sheets Special? 41 5.2 Historic Uses of Central Bank Balance Sheets 43 5.3 Composition of Central Bank Balance Sheet Liabilities 44 5.3.1 Central Bank Liabilities in Normal Times 45 5.3.2 Snapshot of Selected Economies’ Performance before the 2007–008 Crisis 46 5.3.3 Country-by-Country Snapshots of Economic Structure Since 2005 47 5.3.4 A Look at the Balance Sheets: 2005 and 2006 56 5.3.5 Snapshot of Selected Economies’ Performance during the 2007–008 Crisis 65 5.3.6 Snapshot of Selected Economies’ Performance Today 74 5.3.7 Central Bank Liabilities Today 78 Conclusion 86 Questions 86 Chapter 6: Composition of Central Bank Balance Sheet Assets 87 6.1 Central Bank Assets in Normal Times 87 6.1.1 Central Bank Assets of Emerging Economies 95 6.2 Central Bank Assets During the 2007–2008 Crisis 96 6.2.1 Central Bank Assets of Developing and Emerging Economies during the 2007–2008 Crisis 104 6.3 Central Bank Assets Today 104 6.3.1 Central Bank Assets of Emerging Economies Today 112 6.4 Asset-Side Composition and Economic Growth Nexus 115 6.4.1 Asset-Growth Nexus before the 2007–2008 Crisis 115 6.4.2 Asset-Growth Nexus during the 2007–2008 Crisis 116 6.4.3 Asset-Growth Nexus after the 2007–2008 Crisis 116 6.5 The Evolution of Central Bank Balance Sheets in the Future 117 Questions 119 Chapter 7: Financial Ratios of the Central Bank Balance Sheet 121 7.1 International Strength 121 7.2 External Strength Ratio 122 7.3 External Impact Ratio 123 7.4 Liquidity Ratios I, II, and III 123 7.4.1 Liquidity Ratio I 124 7.4.2 Liquidity Ratio II 124 7.4.3 Liquidity Ratio III 124 7.5 Equity Ratio 125 Questions 126 Chapter 8: Central Bank Operations 127 8.1 Types of Central Bank Operations 127 8.1.1 Supply Liquidity 127 8.1.2 Absorb Excess Liquidity 127 8.1.3 Asset Securities 128 8.1.4 Off Balance Swap 131 8.2 Central Bank Policy Instruments 131 8.2.1 Open Market Operations 131 8.2.2 Reserve Requirements 132 8.2.3 Discount Rate 134 8.2.4 Money Market Investor Funding Facility 135 8.2.5 Term Auction Facility 136 8.2.6 Commercial Paper Funding Facility 137 8.2.7 Primary Dealer Credit Facility 140 8.2.8 Recap of Policy Instruments 141 Questions 141 Chapter 9: Real Business Cycles 143 9.1 The RBC Model 143 9.1.1 Features of RBC Models 144 9.1.2 Basic Economic Factors 145 9.1.3 Fluctuations in the Business Cycle 145 9.1.4 Boom and Recession 145 9.2 Concept of RBCs Applied to Economic Policy 149 9.3 Techniques of Estimating RBCs 150 9.4 Methods to Estimate Potential Output and Output Gaps 151 9.4.1 Trending Methods 152 9.4.2 Univariate Filters Method 153 9.4.3 Multivariate Filters 156 9.4.4 Production Function Approaches 157 9.4.5 Criteria for Evaluating Different Methods of Estimating Potential Output 161 Questions 165 Chapter 10: Central Bank Balance Sheets and Real Business Cycles 167 10.1 Linkages between Central Bank Balance Sheets and Real Business Cycles 167 10.1.1 Monetary Policies and Business Cycles 168 10.1.2 Identifying an Acceptable Range of Values 169 10.1.3 Asset Transparency 170 10.2 Impact Evaluation of Central Bank Balance Sheets on Economic Environment 171 10.2.1 Central Bank Balance Sheets and Debt Management 172 10.2.2 Modeling Challenges Confronting Central Bank Balance Sheets 173 Questions 177 Chapter 11: Conclusion 179 Questions Left Unanswered: Areas for Future Research 180 Policy Debates 181 Appendix I: Central Bank Balance Sheets of Different Countries 183 Asia Region 183 Malaysia’s Central Bank Balance Sheets for the Month of February 2018 183 Monetary Authority of Singapore 184 Africa Region 185 Nigeria’s Central Bank Balance Sheets for the Month of November 2017 185 South America 186 Central Reserve Bank of Peru 186 Brazil 188 Chile 189 Argentina 190 North America 193 Mexico 193 Canada 194 United States 195 Appendix II: Abbreviations 197 References 199 Index 205
